THOMAS C. HOLMAN, Bankruptcy Judge.
Defendant debtor Brent Lawrence asks the court to assess sanctions, pursuant to Federal Rule of Bankruptcy Procedure 9011, against plaintiff creditor and the creditor's attorney for filing the complaint in this adversary proceeding. The complaint seeks a determination of nondischargeability of a debt. Defendant seeks sanctions based on the existence, at the time the complaint was filed, of a dispositive, albeit waivable affirmative defense of the statute of limitations.
For the reasons set forth herein, in this case the court grants the motion in part, finds that the filing of the complaint constituted a violation of Bankruptcy Rule 9011(b)(2) which justifies an imposition of sanctions, and assesses sanctions on the creditor's attorney in the amount of
On January 9, 2009, debtor Brent Lawrence ("Debtor" or "Lawrence") commenced a bankruptcy case (the "Bankruptcy Case") by filing a voluntary petition under chapter 7 of the Bankruptcy Code. Lawrence filed his Verification of Master Address List (the "Master Address List") on January 9, 2009. The Master Address list listed "Nancy Butch Robinson" as a creditor. Lawrence filed his bankruptcy Schedules on January 26, 2009. On his Schedule F he listed "Nancy & Butch Robinson" as unsecured creditors holding an unsecured nonpriority claim in the amount of $866,276.00. Butch is the nickname of plaintiff William Robinson, Jr. ("Plaintiff" or "Robinson").
Pursuant to the Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors & Deadlines (the "Bankruptcy Notice") filed in the Bankruptcy Case, the deadline to file a proof of claim was May 7, 2009, and the deadline to file a complaint objecting to the discharge of the debtor or to determine the dischargeability of certain debts was April 7, 2009. Robinson was served with the Bankruptcy Notice.
Robinson did not file a claim in the Bankruptcy Case, nor did he file a complaint objecting to the debtor's discharge or to determine the dischargeability of a debt before the deadline set forth in the Bankruptcy Notice. Robinson did not file a motion to extend the deadline pursuant to Fed. R. Bankr.P. 4007(c). Lawrence received a discharge under 11 U.S.C. § 727 on May 12, 2009. The chapter 7 trustee was discharged and the Bankruptcy Case was closed on April 28, 2011.
On June 21, 2012, the court reopened the Bankruptcy Case on Robinson's motion. On June 22, 2012, long after the deadlines established by the Bankruptcy Notice to do so, Robinson filed a complaint (the "Complaint") commencing an adversary proceeding for a determination of the dischargeability of a debt and seeking revocation of Lawrence's discharge.
The Complaint alleges the following. Lawrence and a third party, Jason Morehouse, purchased real property located at 46 Ord Ranch Road, Gridley, California (the "Property") from Robinson on or about August 7, 2006. In escrow, Lawrence and Morehouse assigned their rights in the Property and the purchase agreement to 46 Ord Ranch Road, LLC ("the LLC"). A portion of the purchase price was paid in cash; the remainder was to be paid pursuant to the terms of a promissory note (the "Note") made by the LLC and carried back by the Robinson. The Note was secured by a Deed of Trust on the Property.
The Complaint alleges that Lawrence subsequently represented to Robinson that if Robinson would subordinate the Deed of Trust to another Deed of Trust (the "RVCB Deed of Trust") for the benefit of River Valley Community Bank ("RVCB"), which RVCB Deed of Trust secured a loan to the LLC from RVCB, Lawrence would personally guarantee the Note. The Complaint alleges that Lawrence provided Robinson with a statement of his net worth and a declaration representing that the loan proceeds from RVCB would be used to make specific improvements to the Property and for no other purpose. The Complaint alleges that these representations were false, designed to induce Robinson to subordinate the Deed of Trust to the RVCB Deed of Trust, and that Lawrence never intended to use the RVCB loan proceeds to improve the Property. Robinson subordinated the Deed of Trust. The Complaint alleges that the RVCB loan proceeds were never used to improve the
The Complaint also alleges that Robinson learned that the loan proceeds from RVCB had not been used to improve the Property in February, 2012. He alleges that he "did not learn of the fraud" until February 7, 2012. At the time that he learned of Lawrence's alleged fraud, Robinson was already prosecuting an action against Morehouse in Butte County Superior Court (the "State Court Action").
On February 22, 2012, before the instant adversary proceeding was commenced, Lawrence's bankruptcy attorney sent a letter (the "February 22, 2012, Letter") to Robinson's counsel in the State Court Action, advising him of Lawrence's discharge and the expiration of the deadline to file a complaint objecting to Lawrence's discharge or to seek a determination of nondischargeability. According to the February 22, 2012, Letter, Lawrence was concerned that Robinson would attempt to amend the complaint in the State Court Action to add Lawrence as a defendant, in violation of the discharge injunction in the Bankruptcy Case.
On June 29, 2012, seven days after Robinson commenced the adversary proceeding, Lawrence's bankruptcy attorney sent a letter (the "June 20, 2012, Letter") to Robinson's counsel in the adversary proceeding, advising him of Lawrence's discharge and the expiration of the deadline to file a complaint objecting to Lawrence's discharge or to seek a determination of nondischargeability. The June 29, 2012, Letter demanded that Robinson voluntarily dismiss the adversary proceeding within ten days, failing which Lawrence would seek, inter alia, sanctions to the extent allowed by Fed. R. Bankr.P. 9011.
Lawrence filed a motion to dismiss pursuant to Fed.R.Civ.P. 7012, incorporating Fed.R.Civ.P. 12(b)(6), on August 20, 2012. Robinson opposed the motion. The court granted the motion on October 1, 2012, dismissing the adversary proceeding without leave to amend. The court dismissed Robinson's claims because they were time barred, the Complaint having been filed long after the expiration of the deadline to assert the claims contained therein. Although Robinson argued that the deadlines should be equitably tolled because he alleged that he did not discovery Lawrence's alleged fraud until after the deadlines had passed, the court ruled that equitable tolling did not apply to extend the deadlines, citing In re Santos, 112 B.R. 1001 (9th Cir. BAP 1990). The court noted that the only exception in the Ninth Circuit allowing equitable tolling was in the case of "extraordinary circumstances" where the court itself misleads a party into the untimely filing of a complaint. Allred v. Kennerley (In re Kennerley), 995 F.2d 145 (9th Cir.1993); Anwiler v. Patchett (In re Anwiler), 958 F.2d 925, 927 (9th Cir. 1992). The court found that the Complaint did not allege any such extraordinary circumstances. In addition, the court dismissed Robinson's claim for revocation of the debtor's discharge under 11 U.S.C. § 727(d)(1) because Robinson did not allege any facts which supported a claim that the debtor obtained his discharge by fraud.
Also on August 20, 2012, Lawrence sent another letter to Robinson's counsel (the "August, 20, 2012, Letter"), to which was attached a copy of the instant Motion for Sanctions Pursuant to (the "Motion"). The August 20, 2012, Letter informed Robinson's counsel that Lawrence intended to file the motion unless Robinson voluntarily dismissed the adversary proceeding. When Robinson did not dismiss the adversary proceeding, Lawrence filed the Motion on September 21, 2012.
Pursuant to Federal Rule of Bankruptcy Procedure 4004(a), in a chapter 7 case a complaint objecting to the debtor's discharge shall be filed no later than 60 days after the first date set for the meeting of creditors under 11 U.S.C. § 341(a). Pursuant to Bankruptcy Rule 4007(c) the same deadline applies for complaints filed under 11 U.S.C. § 523(c) to determine the dischargeability of a debt. Both deadlines may be extended for cause, but motions for extension must be filed before the expiration of the deadline. Fed. R. Bankr.P. 4004(b), 4007(c).
The time limits set forth in Bankruptcy Rules 4007(c) and 4004(a) are not jurisdictional time limits. In re Santos, 112 B.R. 1001, 1006 (9th Cir. BAP 1990). As such, the timeliness of a complaint for denial of discharge or for a determination of dischargeability is an affirmative defense that must be raised in an answer or a responsive pleading; if not raised, it is generally waived, subject to the discretion of trial court. Id. at 1008 (describing factors the court should consider when determining whether a failure to timely raise a limitations defense should constitute a waiver).
Pursuant to Bankruptcy Rule 9011(b), an attorney or unrepresented party presenting to the court a petition, pleading, written motion or other paper is certifying that to the best of the person's belief, formed after an inquiry reasonable under the circumstances, that
Fed. R. Bankr.P. 9011(b)(1)-(4). Bankruptcy Rule 9011(b)(1)-(4) mirrors Fed. R.Civ.P. 11(b)(1)-(4).
In In re Aston-Nevada Ltd. Partnership, 409 Fed.Appx. 107 (9th Cir.2010), the Ninth Circuit Court of Appeals described the standards governing a motion for imposition of sanctions where a violation of Bankruptcy Rule 9011(b)(1) or (b)(2) is found:
In re Aston-Nevada Ltd. Partnership, 409 Fed.Appx. 107, 114 (9th Cir.2010). A sanction imposed for violation of Bankruptcy Rule 9011(b) shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated. To that end, the court may order that the sanctioned party pay a penalty into the court, and/or that the sanctioned party pay the movant's reasonable attorney's fees and other expenses incurred as a direct result of the violation. Fed. R. Bank. P. 9011(c)(2); see also In re Blue Pine Group, Inc., 457 B.R. 64, 78 (9th Cir. BAP 2011) ("sanctions may include `some or all of the reasonable attorneys' fees and expenses incurred as a direct result of the violation'"); and Truesdell v. Southern California Permanente Medical Group, 209 F.R.D. 169, 175 (C.D.Cal.2002) (monetary sanctions may include "either or both" of a penalty paid to the court "and/ or" an award of reasonable attorney's fees to the opposing party). Monetary sanctions may not be awarded against a represented party for a violation of Bankruptcy Rule 9011(b)(2). Fed. R. Bankr.P. 9011(c)(2)(A). An award of attorneys' fees to the opposing party may also be granted only on motion and only when warranted for effective deterrence. Fed. R. Bankr.P. 9011(c).
Pursuant to Bankruptcy Rule 9011(c)(1)(A), a motion for sanctions under Bankruptcy Rule may not be filed with or presented to the court unless, within twenty-one days after service of the motion, the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected. In this case, Lawrence served Robinson with the Motion on August 20, 2012, and, when Robinson did not dismiss the Complaint, filed the Motion on September 21, 2012, thirty-two days later.
Although neither Robinson nor Lawrence identified or addressed it in their written arguments, at issue here is whether, given the existence of the waivable defense of the statute of limitations, Robinson's filing of the Complaint constitutes either a pleading presented for an improper purpose pursuant to Bankruptcy Rule 9011(b)(1) or a frivolous claim pursuant to Bankruptcy Rule 9011(b)(2). There is no controlling authority in the Ninth Circuit which squarely addresses the foregoing issue. However, three other federal circuit courts of appeal have done so.
In Brubaker v. City of Richmond, 943 F.2d 1363 (4th Cir.1991), the Fourth Circuit Court of Appeals reviewed a district court award of Rule 11 sanctions against a plaintiff for bringing a defamation claim against a city, city council member and the executive director of a human relations commission because "a reasonable inquiry into Virginia limitations law would have demonstrated that any defamation claims ... were clearly time-barred." Id. at 1383-84. The Fourth Circuit affirmed the decision.
Id. at 1384-85(footnotes omitted). Sanctions are warranted where the claimant has "absolutely no chance of success under existing precedent." Id. at 1377.
In Souran v. Travelers Insurance Co., 982 F.2d 1497 (11th Cir.1993), the Eleventh Circuit Court of Appeals reversed the imposition of sanctions against a plaintiff who filed an action on an insurance policy in the face of a potential affirmative defense of fraudulent procurement:
Souran, 982 F.2d at 1510(emphasis added).
Finally, in White v. General Motors Corp., 908 F.2d 675 (10th Cir.1990), a case discussed Souran, the Tenth Circuit Court of Appeals stated:
Id. at 682 (emphasis added). See also David H. Taylor, Filing With Your Fingers Crossed: Should a Party Be Sanctioned For Filing a Claim to Which There is A Dispositive, Yet Waivable, Affirmative Defense?, 47 Syracuse L.Rev. 1037 (1997) for a discussion of Brubaker, Souran, and White. Taylor places the three cases on a spectrum, with Brubaker characterized as a "hard line," Souran being a softer, "no sanctions" approach that takes into account the pleading burdens on each side of an action and White occupying a middle ground where sanctions are appropriate if the affirmative defense is obvious
This court follows the approach set forth in White. The court concludes, on the facts of this case, that the filing of the Complaint asserting a claim for a determination of nondischargeability is a sanctionable violation of Fed. R. Bankr.P. 9011(b)(2). When preparing and filing a complaint for a determination of nondischargeability, a reasonable attorney would investigate whether the deadline for filing such a claim had passed. In this case the deadline was clearly set forth in the Bankruptcy Notice. The deadline, as well as the circumstances under which it may be extended, are clearly defined in Fed. R. Bankr.P. 4007. In addition, Lawrence informed Robinson and his counsel on two separate occasions — one well before the adversary proceeding was commenced and one shortly after — of the fact that the deadline had passed and that Robinson's complaint was time-barred. In light of the foregoing the burden fell on Robinson to determine he had colorable, non-frivolous argument in support filing the Complaint despite the expiration of the deadline.
Robinson has not shown that any such argument exists. He merely argues that it would be inequitable to prevent him from bringing a nondischargeability claim based on Lawrence's alleged fraud because he allegedly did not discover the fraud until after the deadline has passed.
The court does not find that the filing of the Complaint was done for an improper purpose in violation of Fed. R. Bankr.P. 9011(b)(1). An improper purpose is generally found where the evidence shows that the party against whom sanctions are sought has engaged in a pattern of abusive litigation for the purpose of delay or harassment. See Aetna Life Ins.
Because the court finds that the filing of the Complaint constitutes a violation of Bankruptcy Rule 9011(b)(2) only, the court will not impose monetary sanctions on Robinson. Fed. R. Bankr.P. 9011(c)(2)(A). The court may impose non-monetary sanctions on Robinson, but in light of the fact that the adversary proceeding has already been dismissed, the court declines to impose a non-monetary sanction.
As for Robinson's attorney in the adversary proceeding, W. Steven Shumway, the court finds on the facts of this case that an award of Lawrence's attorney's fees in the amount of $16,046.90 incurred in connection with defending the adversary proceeding, payable to Lawrence's counsel, will effectively serve, the overriding deterrent purpose of Bankruptcy Rule 9011. The award of attorneys' fees sends a message to Mr. Shumway and to those similarly situated that the risk of pursuing frivolous litigation in a case such as this is that those who do so may be required to pay for the cost of defending it.
The court will issue a separate order that conforms to the foregoing decision.
